China Considers Economic Benefit to Joining Trans-Pacific Partnership

Joining the Trans-Pacific Partnership (TPP) would add two percentage points to China’s annual GDP, according to the new chief economist of the People’s Bank of China, Ma Jun.

During an internal presentation in mid-June, Ma Jun predicted that the economic benefits of joining the TPP would be such that China’s GDP would grow by an extra two percentage points per year. Ma also stated that the economies of South Korea and Vietnam would benefit from a boost of more than two percentage points as well. In addition, Ma recommended that China should commence negotiations to join the TPP as soon as possible in order to seize the available economic opportunities.

The TPP, which is on its way to becoming the largest and most ambitious free trade agreement in the world, will be far more comprehensive than usual free trade agreements (FTAs). As well as including typical FTA content such as the reduction of tariffs in key sectors of the economy, the TPP will extend its scope to cover intellectual property protection, environmental standards and digital commerce rules.

The original form of the TPP was signed on July 2005 by Brunei, Chile, New Zealand and Singapore and was implemented between May and November 2006.As a result of the financial crisis in 2007-08, and reflecting the broader trend of the U.S. pivot towards Asia, the U.S. launched negotiations for a new version of the FTA with a broader membership in November 2009.

Twelve countries throughout the Asia-Pacific region are currently in negotiations regarding the TPP –the U.S., Canada, Mexico, Malaysia, Vietnam, Peru, Australia and Japan, along with the four original members. If these negotiations are successfully concluded, the partnership will represent approximately two-fifths of world GDP. Recognizing the potential economic benefits involved, several other countries have also expressed an interest in membership, such as the Philippines, Thailand, South Korea, Colombia and India.

One of the countries which is set to profit considerably from the TPP is Vietnam, as outlined by Ma Jun earlier this month. To take the apparel and footwear industry as an example, Vietnam exported approximately US$9.4 billion worth of products from this sector to the U.S. alone in 2012. Upon the conclusion of the TPP, Vietnam will be able to export these items to other TPP countries, such as the U.S., Australia and Japan, at a 0 percent tariff rate, making their exports even more competitive and potentially giving them a larger share of the apparel and footwear markets in these countries.

With regards to China, if Ma is correct in his prediction that joining the TPP would give the country a two percentage point boost to its GDP, doing so may help China to prevent the economic hard landing which many analysts have speculated is a possibility. The TPP, with its focus on investment, government procurement and services, would be compatible with China’s economic priorities at its current stage of development.Ma has forecast that joining the TPP would benefit the textile, apparel and electronic equipment industries in particular, although it could also hurt certain industries, such as mining, petrochemicals and vehicles.

In addition to Ma, the Peterson Institute for International Economics (PIIE) has also forecast that the TPP would boost the GDP of its member countries, with predictions of a 4.7 increase to national income over a decade for China, nearly three times higher than their prediction of 1.6 percent for the U.S. When considering the indirect benefits of the TPP, such as the likelihood that domestic reforms would be advanced by efforts to meet the high standards necessary to join, the PIIE anticipates that the economic boost would be even greater.

Given the important role that China has in the world economy, China’s absence from the TPP is a conspicuous one which, arguably, weakens the overall strength and relevance of the agreement.After all, China is the largest or second largest trading partner of all of the negotiating countries other than Brunei, for which it is the fourth largest trading partner.

Nevertheless, despite the economic benefits of China joining the TPP, several counties remain hesitant about allowing China to do so. Although the U.S. has publicly asserted that China is welcome to join the TPP if it is willing to meet the rules and standards that are currently being negotiated, privately some would prefer that the agreement excluded China in order to contain the country’s increasing political and economic influence.

Furthermore, some countries, such as Canada and New Zealand, are reluctant to allow China or any other interested country to become part of negotiations until all rules have been finalized, out of concern that expanding the membership at this stage could slow down or further complicate proceedings.

Their concerns are perhaps somewhat justified when one looks at the extent to which the current countries involved in TPP negotiations are struggling to reach consensus and move forward. Despite having made notable progress last year, negotiations for the TPP have recently reached an impasse following the release of several sensitive TPP documents on WikiLeaks and, more recently, a deadlock between Japan and the U.S. regarding Japan’s ultra-sensitive agricultural import duties. Despite an original target date for the settling of TPP negotiations by November 2011, progress has sputtered for several years and proceedings are now unlikely to be concluded until the first half of 2015 at the earliest.

China has been paying close attention to the development of the TPP. “We attach great importance to the progress of TPP negotiations. We also keep in touch with the main participants of TPP negotiations… [and] hold a comprehensive and open attitude,” said Commerce Minister Gao Hucheng earlier in the year.

However, China is understandably not thrilled about joining a partnership that will see U.S. standards imposed on the region. Within China, many experts have said that the TPP rules regarding sensitive issues such as zero tariffs, labor rights, environmental standards, intellectual property protection, the liberalization of services and the reform of state-owned enterprises would not serve Chinese interests and that the trade agreement is best avoided.

Furthermore, the prospect of not being allowed to join the TPP until the current round of negotiations has been completed is not going to make the idea any more attractive. For China, the current development of the TPP is bringing back bad memories of the country’s accession to the World Trade Organization in 2001. Embarrassment still lingersregarding the deep concessions that the country offered, which many saw as China effectively ‘kowtowing’ to the West. This time around, they don’t want China to be adhering to U.S.-standards – they wish to be involved in the setting of standards from the beginning.

To date, China has abstained from the TPP in favor of the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement which offers China a more prominent role in setting standards and, importantly, excludes the U.S. from negotiations. Last month, China also pushed for APEC to get a previously proposed Asia-Pacific FTA, the Free Trade Area of the Asia Pacific (FTAAP), off the ground.

China is a prolific pursuer of FTAs and of the current TPP negotiators, China has bilateral FTAs in place with Singapore, Peru, Chile and New Zealand, as well as free trade links with Vietnam, Malaysia and Brunei under the China-ASEAN FTA. It is also in talks for further FTAs, such as the China-Australia FTA, which the Australian government hopes to finalize by the end of the year.

Therefore, while joining the TPP could arguably, as Ma suggests, boost China’s economic growth by two percentage points over the next few years, whether China decides to join TPP negotiations or not, the future of trade between China and other Asia-Pacific countries is sure to be bright. The size and energy of China’s economy and China’s location, not to mention China’s increasing political influence, will undoubtedly continue to motivate strong economic relations with Asia-Pacific countries for the foreseeable future.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

The Contributor

China Briefing hosts a wealth of business intelligence on legal, tax, and operational issues in China from a practical perspective. Knowledge, expertise and commentary for China Briefing is regularly contributed by Dezan Shira & Associates´ professional legal and tax staff. Currently located in Futian district, Dezan Shira & Associates has been assisting foreign companies in Shenzhen for 22 years.